People ask me why I haven’t bought any weed stocks yet. Last fall when bitcoin was going vertical, people asked the same thing about that bandwagon. In my mind, the answer has always been:
I prefer to invest in businesses I understand—in which I know I’m good at picking winners.
But having meditated upon it and plumbed the depths of my emotions, I have to admit that there’s more to it than that.
I hate losing money.
I’m a big boy and I only speculate with money I can afford to lose—but that doesn’t mean I enjoy it when it happens. More important is that I absolutely loathe it when I make a bet I know isn’t great, but I’m tempted for some reason, and I love money. Losing the money is the least of it. Making the mistake when I knew better is what really gets me.
If I had a time machine and could go back and speculate on an investment fashion before it became obvious to everyone, I’d be happy. But I don’t, and by the time such a trend is obvious to everyone, it’s likely something of a mania. That’s the worst time to invest.
It’s not, “buy low, sell high.” It’s, “buy high, hope to sell higher.” Not my cup of tea.
For example, if I had bought bitcoin last fall when it started going vertical, around $10,000, for instance, I might have almost doubled my money at the peak. But that assumes I’d have recognized the peak and sold. I’d be in the red now. I pity the folks who bought bitcoin near $20,000, sure it was going to $40,000—or $100,000.
Now… How do I know the same thing isn’t true of weed stocks today?
And I don’t think anyone else does either.
Weed is, after all, called that for a reason; it grows everywhere, easily, and quickly. It’s hard to see it as a business around which anyone can build a Warren Buffet style defensive “moat”. Someone’s going to make money in the business, but it might just end up being the Canadian taxman, and not US investors.
I’d rather miss out than invest in something I don’t understand and then have to feel stupid for having gambled in ignorance. Or, put another way:
I’m simply not a momentum chaser.
I might jump on a flavor of the day that’s gaining momentum, but I’ll do it because I understand the fundamentals and see a sustainable trend.
I understand that this does mean missing out a lot.
On the other hand, I’m not sure I’ve met any momentum chasers who are as good at realizing profits as they are at bragging about unrealized gains while they have them.
Fortunately, it’s not just “momentum or nothing.” There’s an alternative.
The tried and true way to “buy low, sell high” is to be a contrarian investor.
This is the #1 lesson Doug Casey and Rick Rule have emphasized over the years. As Rick likes to say, you’re either a contrarian or you’re roadkill waiting to happen. Even Warren Buffet agrees, saying that one should be fearful when others are greedy and greedy when others are fearful.
That’s fine, as a general principle. But how, specifically, does one put it into practice?
Well, different strokes for different folks, but the markets I understand best are in the resource sector. Happily, natural resources are both essential to billions of people around the world and highlight cyclical in price. That means that when prices cycle low, you can know they will cycle higher. Buy low, sell high.
But even here you have to be careful. Commodities tend to move together in a super-cycle, but they don’t all march in lock-step. And sometimes a commodity’s main use becomes obsolete. That’s the case with platinum right now, for example. It’s precious, but it’s also primarily an industrial metal used in diesel engines, which are on their way out.
Given my experience and track record, I’m confident I can pick winners and beat the market in this space. I’m excited to be able to buy low this year.
I hope you are too.
Contrarian or roadkill—the choice is yours.
Thursday, October 11, 2:29pm, EST, 2018